'Razor Thin Margins' Are the 'New Normal' for Hospitals, Kaufman Hall Says

New analysis highlights the rising cost of goods and services; plus, flat patient volumes will define hospital margins going forward.

Hospital margins have been under pressure for the last three years as healthcare providers work to navigate the new reality the pandemic has created. While 2022 was reported to be the worst financial year on record since the start of COVID-19, recent Kaufman Hall data is showing that finances are beginning to stabilize "as razor-thin margins become the new normal."

Hospital margins were -1.1% in February, down slightly compared to the -0.8% in January, according to the Kaufman Hall research. This is the eighth consecutive month where the variation in month-to-month margins has fallen, relative to the last three years. Flat margins are likely to continue in the near term, Kaufman Hall says, as a result of "external economic factors" such as expenses, inflation, and labor issues. The primary driver of hospital expenses in February was the cost of goods and services, shifting away from labor issues—which are still a factor.

"After years of erratic fluctuations, over the last several months we are beginning to see trends emerge in the factors that affect hospital finances like labor costs, goods and services expenses, and patient care preferences," Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said in the report. "In this new normal of razor-thin margins, hospitals now have more reliable information to help make the necessary strategic decisions to chart a path toward financial security. Hospital leaders face an existential crisis as the new reality of financial performance begins to set in. 2023 may turn out to be the year hospitals redefine their goals, mission, and idea of success in response to expense and revenue challenges that appear to be here for the long haul."